MSFT Stock Is a Buy — Why Microsoft Is More Than Just a PC Play

Gaming and Windows Phone have upside, as does a Google-like strategy at MSFT

Microsoft (MSFT) gets a bad rap as a tired old play on the PC biz, suffering from declining licenses for Office and Windows and a false start in mobile with its Surface tablet.

But MSFT stock clearly has this negativity priced in, and those who are just focusing on Windows and Surface are missing the point at Microsoft.

Consider these recent developments at MSFT that show the potential of this tech giant:

Xbox One Holiday Sales: If you think video games are child’s play, consider the epic recent release of Grand Theft Auto V from publisher Take-TwoInteractive (TTWO) that racked up $1 billion in sales in just a few days. Video games are big business, and the launch of the highly anticipated Xbox One around Thanksgiving could result in a banner Q4 for Microsoft. Yes, Windows and legacy businesses are the lion’s share of MSFT revenue … but Xbox One can be a big driver this fall and winter, and shouldn’t be overlooked.

MSFT Working With China Gadget Company: Speaking of video games … Chinese Internet TV company BesTV New Media is jumping into a joint venture with MSFT to develop “family games and related services” for Asia audiences. Given the wild success of the Microsoft Xbox console, tapping into a lucrative Chinese gaming market could be a huge play for MSFT long-term. China looks likely to end its 13-year ban on gaming consoles, but if it doesn’t, a connected TV or other gadget could be a powerful end-around for the Xbox brand in the region.

Challenging Google: While behemoth Google (GOOG) remains the biggest player in advertising and search, MSFT is no slouch. Just think about the Microsoft ecosystem of Bing search, Outlook email, Office 365 cloud-based docs, Windows Phone and Windows 8 mobile software … sounds a lot like the wide scope of GOOG, doesn’t it? While Microsoft is right now a distant player in these markets, MSFT is clearly thinking about synergy — and has the reach, brand and cash to keep pounding away at this mission.

Nokia Hardware: MSFT recently bought the device division of Nokia (NOK) for roughly $7.2 billion after several years of teamwork between the businesses, and this integration will allow Microsoft to feature the best of its software and generate good margins as it keeps gadget production 100% in-house. Remember, BlackBerry (BBRY) is disappearing, so there’s room for a viable No. 3 in the smartphone space behind GOOG’s Android-powered devices and the Apple (AAPL) iPhone. Recently, Windows Phone had been clawing market share from BlackBerry, and that trend will accelerate as BBRY operations are carved up or restructured under a buyout deal.

MSFT Stock Will Be Kind to Shareholders: With ValueAct making noise at Microsoft, longtime CEO Steve Ballmer recently got the boot. And you can bet that ValueAct will continue to make a fuss at MSFT to deliver capital back to shareholders via dividends and buybacks, meaning the current 2.6% yield will tick higher in the years ahead and that Microsoft stock buybacks will boost EPS even if profits don’t burn down the house.

With a forward price-to-earnings ratio of less than 11, with negativity baked in after the $900 million Surface writedown and with Wall Street hammering and PC-related plays like Microsoft … it might be time to consider bargain hunting in MSFT.

There are risks, yes. But with $87.5 billion in cash and almost $29 billion in operating cash flow, let’s not be naive about the stability of this tech giant.

At worst, MSFT will deliver a solid and low-risk dividend. But given the recent moves, there’s a chance for this battered tech giant to find new life in 2014.